This invention relates to data processing methods and apparatus for implementing and administering a program for insuring the funding of a future liability of uncertain future cost when that liability can be funded fully prior to the projected date of the liability at a cost that is known and fixed at the date of funding. In particular, this invention relates to a data processing method and apparatus for issuing floating rate zero coupon note purchase insurance to insure the availability of financial means for purchasing a floating rate zero coupon note or other similar financial contract or obligation, which is designed to fund fully a future liability whose projected due date and whose present cost are known but whose future cost is unknown, upon the death of the prospective purchaser of the floating rate zero coupon note. More generally, this invention relates to a data processing method and apparatus for issuing such insurance in the form of one-year renewable-term life insurance and for funding this insurance program such that the funds available through the investment of the proceeds from the sale of the insurance and the reinvestment of interim cash flow will be sufficient to cover in full or in predetermined part in a timely manner the cost of purchasing the floating rate zero coupon note whose purchase is insured in the event the person on whom the insurance policy was written should die during the term of the policy.
The floating rate zero coupon note whose purchase is being insured carries an interest rate which varies automatically with the rate of inflation of the cost of some specified service or commodity and its interest payments are automatically reinvested, so as to fund fully the currently uncertain cost of the service or commodity at a future date. When all the interest payments are reinvested, the value of the floating rate zero coupon note (initial principal plus accrued and reinvested interest) increases over time in a manner that assures that the value of the floating rate zero coupon note as of its maturity date equals as of that date the cost of the service or commodity that was to be defeased.
The price charged for a floating rate zero coupon note, which together with the number or fraction of floating rate zero coupon notes whose purchase is insured determines the amount of the death benefit payable under the floating rate zero coupon note purchase insurance policy, depends on the current most of the service or commodity, the projected rate of escalation in the cost of this service or commodity over the life of the floating rate zero coupon note, current interest rates, projected future interest rates, the risk premium that compensates the floating rate zero coupon note issuer for assuming the cost escalation risk and the floating rate zero coupon note issuer's target profit margin. Specifically, the price of a floating rate zero coupon note is obtained by first escalating the current cost of the service or commodity at the projected rate of escalation in the cost of this service or commodity, and then discounting this escalated value at a rate that equals (1) the projected yield to be realized on the investment of the proceeds to be received from the sale of the floating rate zero coupon note and on the reinvestment of interim cash flows minus (2) the risk premium and minus also (3) the target profit margin. Although not essential to the operation or understanding of this invention, further details of the floating rate zero coupon note are provided in copending, commonly-assigned U.S. patent application Ser. No. 849,779, filed Apr. 9, 1986, entitled "Method and Apparatus for Funding a Future Liability of Uncertain Cost."
The floating rate zero coupon note is designed to fund a future liability whose projected due date and whose present cost are known and whose future cost is unknown but can be projected with some risk factor. The floating rate zero coupon note is different from traditional insurance programs, mutual funds and other investment programs, which only hedge a future liability, because it defeases the future liability. It will cover fully the cost of the service or commodity on the projected due date, eliminating to the purchaser of the note the risk of underfunding.
However, the risk of underfunding is fully eliminated only if the purchaser pays in full the purchase price of one full unit of the floating rate zero coupon note. Personal budget constraints might preclude a one-time purchase of a full unit, requiring multiple purchases of fractional units over time in order to accumulate one full unit, or the purchase of a full unit on an installment basis. If the person is purchasing the floating rate zero coupon note on behalf of someone else, multiple purchases of fractional units or installment purchases expose the beneficiary to the risk that the purchaser's death could occur before the purchase of a full unit is fully funded. For example, if the floating rate zero coupon note is intended to fund the uncertain future cost of one year of college education and a parent who is purchasing fractional floating rate zero coupon notes on behalf of a child dies before a full unit has been purchased, the surviving parent or others will have to raise the cash from other sources to pay for the balance of the floating rate zero coupon note. However, the day-to-day purchase price of the floating rate zero coupon note may increase as a function of increases in the rate of inflation of the future cost of college. Insurance proceeds from a conventional life insurance policy on the deceased might be able to cover this uncertain purchase price, if there is adequate insurance and if the insurance proceeds are not needed for other purposes. But traditional life insurance programs are not designed to fund fully a potential future liability of uncertain cost, such as the purchase price of a floating rate zero coupon note which may escalate over time with the rate of inflation of the future cost of college or some other specified service or commodity.
Accordingly, there is a need for an insurance method which will fully fund a potential future liability of uncertain cost, such as the purchase price of a floating rate zero coupon note or other similar financial contract or obligation, which ties the insurance benefit directly to the price of the underlying uncertain cost, so that the future liability will be fully funded in the event of the premature death of the person funding the liability.